Complying with Estimated Quarterly Taxes
Not all self-employed individuals are required to pay taxes quarterly, and quarterly payments are not limited to the self-employed. If you are required to make estimated tax payments, it is essential to know the federal and state deadlines. Missing them could result in costly underpayment penalties when Tax Day arrives.
Who Is Required to Pay Estimated Taxes?
Anyone who has income that is not derived from a salary paid by an employer may have to pay quarterly taxes. This includes those receiving income from the following sources:
Self-employment
Interest
Dividends
Alimony
Capital gains from selling stock, bonds, and other assets
A business, including rental property income
Prizes and awards
However, you do not automatically have to pay estimated taxes if you have income from one of these sources. According to the IRS, you are generally required to pay estimated quarterly taxes if both of the following apply:
You expect to owe at least $1,000 in federal income taxes when you file your tax return (after accounting for your withholding and refundable credits); and
You expect your withholding and refundable credits to cover less than 90% of your tax liability for the year, or 100% of your liability for the last year (whichever is smaller).
Why Do I Have to Pay Estimated Taxes?
All taxpayers should “pay as they go, so they won’t owe,” says the IRS. When you have an employer, you automatically pay as you go in the form of paycheck withholdings. Your employer withholds tax from your pay and sends it to the IRS on your behalf.
But when you do not have an employer, you are responsible for paying as you go. That is because income from self-employment, interest, dividends, rents, and other sources is not subject to withholding.
Failure to pay enough tax throughout the year—whether through withholding, estimated tax payments, or a combination of the two—could result in an underpayment penalty. The number of taxpayers subject to estimated tax penalties increased from 7.2 million in 2010 to 10 million in 2015, the IRS reports.
When Are Estimated Taxes Due?
As the name implies, estimated quarterly taxes are due once per quarter, or four times per year. The estimated tax payment schedule is listed below. These payment dates are usually the same every year, but make sure to confirm the actual dates for each tax year. In addition to a tax penalty assessed for underpayment, you could receive a penalty for late quarterly tax payments.
Income Period
Estimated Tax Payment Due Date
January 1 – March 31 = April 15
April 1 – May 31 = June 15
June 1 – August 31 = September 15
September 1 – December 31 = January 15
How Do I Pay Estimated Taxes?
You pay quarterly taxes directly to the IRS. To calculate the amount you owe, figure out your estimated tax burden for the entire year and then divide this number into four equal payments. For reference, you can use your tax return from the previous year to get an idea of how much you will owe. In fact, there are payment vouchers near the end of the tax return that make it easy to estimate your taxes.
It is better to overestimate than to underestimate due to the risk of an underpayment penalty. There is no harm in overpaying because you can get that money back in the form of a tax refund or apply the overage to future payments.
Taxpayers whose income varies from quarter to quarter might have to adjust this figure. The IRS has a Tax Withholding Estimator that can help you find your best estimate. Similar tools are available from other online sources, such as TurboTax.
The easiest way to make an IRS estimated tax payment is using IRS Direct Pay or the Electronic Federal Tax Payment System (enrollment required). You can also send a check or money order to the IRS. Regardless of how you pay, you will use Form 1040-ES. More information on all payment options is available at IRS.gov/payments.
Do I Have to Pay State Estimated Taxes?
Except for Utah, states also have estimated tax requirements. These are similar to federal requirements, but states have different income thresholds and penalties for estimated taxes, so make sure you understand the rules where you live.
Look for the state payment vouchers on last year’s tax return if you are unsure of how much to pay.
Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute legal advice. Reading this article does not create an attorney-client relationship between you and Apricity Law, PC. Legal issues are complex and fact-specific; you should not act or rely on any information contained herein without first consulting a qualified attorney regarding your specific situation. While we strive to keep this content current, laws and regulations may change, and we do not guarantee the accuracy, completeness, or timeliness of the information provided. If you require legal assistance, please contact Apricity Law, PC to discuss your matter.